Some GM and Fiat History

[mgescuro]

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For GM and Fiat, A Messy Breakup Could Be in Works

By GABRIEL KAHN in Turin, Italy, STEPHEN POWER in Frankfurt and ALESSANDRA GALLONI in Milan
January 24, 2005

TURIN, Italy – Nearly five years into a partnership they once touted as made in heaven, General Motors Corp. and Fiat SpA are in tense talks about a possible breakup that could further batter their finances and reverberate across the auto industry.

Despite months of negotiations, the two sides remain miles apart on the major sticking point: a put option that could force GM to buy the 90% of Fiat's ailing, debt-laden auto unit that GM doesn't already own. Fiat's chief executive, Sergio Marchionne, has stated repeatedly that he has the right to exercise the put beginning today, when a so-far unsuccessful mediation process expires.

The situation is even more dire for Fiat, an Italian industrial icon that also owns businesses such as Iveco trucks, CNH farm equipment and Ferrari sports cars. Fiat Auto's operating losses for 2004 are expected to total around $1.3 billion. With Fiat Auto burning through cash rapidly, the put option has emerged as a potential lifesaver for Mr. Marchionne, a turnaround specialist who arrived at the Italian auto maker in June following a management shakeup. He has made resolving the issue his top priority and forced GM into a tense set of negotiations.

People close to Mr. Marchionne say he hopes to force GM to pay handsomely to get out of the obligation, thus buying Fiat some time. But the price would have to be high -- in excess of nearly $2 billion -- to provide the car unit the 18 months of extra cash needed to tide it over as it tries to bring important new models to the marketplace.

Fiat Auto is running on fumes. In a rapidly consolidating industry of global giants, it is caught in a trap of high fixed costs and shrinking market share. Fiat SpA reports that without a payment from GM, the conglomerate's current cash and cash equivalents will last only between 13 months and 20 months.

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Fiat rose to prominence in the '50s and '60s, when it could claim dominance of the Italian market. Its owners, the Agnellis, were powerful and fashionable figures, hobnobbing with the likes of the Kennedys. As the market liberalized in the 1990s, Fiat's clunky sales network and laggard technology left it unprepared to handle the flood of competition. When GM and Fiat linked up in the boom year of 2000, neither believed things would ever get so ugly.

But the alliance was fraught with fissures. Shortly after the deal was announced, in March 2000, Gianni Agnelli, longtime patriarch of the Agnelli clan, revealed that he had turned down an $11 billion offer to sell the entire car unit to DaimlerChrysler. Selling only 20% to GM, he thought, would allow him to retain control of the business his grandfather had founded in Turin more than a century earlier -- saving the family honor and the Italian character of Fiat.

Other members of the family, including Mr. Agnelli's younger brother, Umberto, disagreed. They no longer felt duty bound to keep Fiat in Italian hands -- especially if doing so risked the family's own fortune. They also faced the serious prospect that Fiat Auto would be unable to achieve the scale and financing to survive in the global auto industry.

Still, both companies acted as if they had just sealed a love match. GM held a lavish event that June at Palazzo Arzaga, a 15th-century monastery in northern Italy converted into a modern-day resort, to outline its global strategy for analysts and journalists. Fiat's then-chairman, Paolo Fresco, landed in a helicopter to join Mr. Wagoner and other GM brass to extol the partnership. Senior GM executives had driven Ferraris around Fiat's test track several days earlier. The put option, Fiat executives emphasized, was merely an insurance policy, something Fiat never expected to use.

But inside Fiat's Turin headquarters, "the crisis was evident," says Mario Rosso, a former Fiat executive who headed human resources and ran the government liaison office in Rome. The company was hobbled by slow product rollouts, high costs and slow decision-making, he says, "but these issues hadn't fully expressed themselves on the books yet."

Moreover, General Motors never grasped the complexity of Fiat Auto, and the tactics it used to prop up sales in its most important market of Italy, according to Mr. Rosso. Fiat Auto relied on the government to offer frequent tax breaks for trading in used cars for new ones. This helped pump up sales, but foreign competitors were barreling into Italy with cheaper cars and stronger sales networks. And the Italian government no longer doled out favors the way it once had.

GM "did a classic financial due diligence, when in reality, the situation was much more complicated, and required understanding the strategic, political and social situation of the company," says Mr. Rosso.

Nor did GM fully understand how provincial Fiat's corporate culture was. In the late 1990s, 80% of Fiat's top management came from the Piedmont region in Italy's northwest. At board meetings top managers would sometimes speak in the local dialect, recalls Mr. Rosso.

Meanwhile, disastrous decisions began to haunt Fiat Auto. Gianni Agnelli, who died in 2003, had been smitten with creating a "world car" -- a single model to sell around the world. So, Fiat poured money into expanding global production. It vowed that its world car, the Palio, would sell one million vehicles a year; it is only now reaching 400,000 vehicles a year. In 2001, Fiat bet heavily on one model -- the Stilo -- to boost margins. Consumers found the car too bulky and loaded with gadgets they didn't want to pay for. It flopped.

By the end of 2002, Fiat Auto was out of gas and sucking cash from the group's truck and tractor units. Desperate, the group put many of the unit's best assets up for sale. It also sold off its stake in GM to raise cash. The government, worried about the social repercussions should Fiat go bankrupt, lined up banks to extend the group nearly $4 billion in new loans, convertible into equity. After some hesitation, the Agnellis agreed to crack open the family treasure chest and kick in about $325 million for a recapitalization.

GM, asked to pitch in, stayed out, and its 20% stake in Fiat Auto was diluted to 10%.

As Fiat Auto skidded, the put option swelled in importance. Fiat's calculation: With the put, it could force GM to pay up to free itself from the obligation to buy the Italian auto unit. Fiat struck up negotiations with GM about how to cancel the put option for cash.
But negotiations went nowhere because of disarray in Fiat's senior ranks. The company's worsening finances prompted the Agnellis to run through five CEOs in less than two years. The chairmen changed as well, as Umberto Agnelli took over from Mr. Fresco and then died a little more than a year later.

The music changed abruptly when Mr. Marchionne arrived. An Italian who grew up in Canada, he was an outsider to the insular world of Fiat. He was also a hard negotiator who felt no bond to Fiat's storied automotive unit. He quickly seized on the put option as the best solution for tackling the auto unit. The Fiat chief didn't even try to argue that the company's auto unit could be fixed.

"We didn't think he was the kind of guy who was interested in fixing a company that's beyond repair," says Mr. Boyer. "He only perked up when we talked about the put."

Asked about Mr. Marchionne's strategy, Fiat insists that it is executing a turnaround plan that includes rolling out new models, cutting costs and streamlining its decision making. Mr. Marchionne declined to be interviewed for this article.

[mgescuro]

It's a long sordid history. I'm shocked that GM didn't do the proper due diligence on this deal!! That was just sloppy.

But can you imagine DCX now if they had acquired Fiat for $11B???? DCX could be in utter collapse!!